Part 2: Specifics of setting up a Company
--> Read Part 1 of this article
By Terrie Lloyd
In Part 1 of this article, published in the Autumn 2006 issue, we took an overall glance at the new rules of incorporating in Japan. In part 2, we take a specific look at what it takes under these new rules to get down to business.
Nobody ever said that setting up a company in Japan was easy, and the new rules don’t do much to improve that situation, unless you choose a Godo Kaisha (GK) or Joto Seigen Kabushiki Kaisha (JSKK), in which case you don’t need to have a Board of Directors and all that that entails. Instead, the rules are designed to make it cheaper for more people to start their own business, while at the same time increasing accountability and compliance.
For the purpose of illustration for this article, we are going to show the steps involved in setting the most complicated company format, a Kokai Kabushiki Kaisha (KKK or just KK), since this serves as a superset of the tasks required to set up a company. If you decide to set up one of the less demanding vehicles, you can delete the unnecessary steps.
Overall procedure of setting up a KK company is as follows:
How long does it take?
As of writing, in August 2006, thousands of companies a month are being established in Japan – testament to the improved accessibility that the new rules have created for average Japanese to make their own company. As a result, whereas setting up a company under the old system took about 4-5 weeks, it now takes 6-8 weeks, because of backlogs in each responsible agency. The new rules should eventually make setting up a business quicker than before, and paralegal agencies tell us that they expect things to settle down in 2007.
Of course, these estimates assume that you’re fluent in Japanese, know what you are doing, or that you have help, such as a Judicial Scrivener (“Shiho Shoshi”) or law firm. The fact is that if you’re creating a company for the first time, there are a lot of details in the registration process that can trip you up and require further forms or evidence, thus blowing out the timeline.
Steps to incorporate
One or more promoters are required to form a Japanese corporation. These promoter(s) may be natural persons or juridical persons and need not be residents of Japan, but as indicated above, it is easier if they are. If there is more than one promoter, then usually they will appoint a single representative to effect the establishment process. Each promoter must hold at least one share. The promoter(s) may subscribe for all the shares or may solicit subscriptions from third parties.
2. Articles of Incorporation
The promoter must prepare and submit the Articles of Incorporation (“Teikan”) for attestation by a Japanese notary public (“Koshonin”). The Notary confirms that the Articles comply with Japanese laws and that they have been executed by all the promoters. In Japan, a Notary is an important legal officer and is harder to find than abroad, so ask your local Ward or City office for contact information.
3. Share subscription
If the promoter wants to have third-party investors invest in at the time of incorporation, he/she must designate a special bank account in Japan (“Betsudan Ryokin”) to which the subscription proceeds will be paid. A bank employee will be responsible for transactions relating to this special, temporary account, and all questions and confirmation can be directed to them.
Besides the Promoter, other intending shareholders apply for shares to the Promoter, and pay their subscription funds directly to the bank account set up by the Promoter. The payment is made a few days before the prescribed date (i.e., the date on which the corpo-ration is to be formally registered), and the funds are held by the bank in trust as capital for the new company.
In due course, a certificate is issued by the bank confirming its receipt of the paid-in capital funds. The promoter submits this certificate to the Legal Affairs Bureau together with other incorporation documents. The Legal Affairs Bureau then issues a certificate of incorporation to the promoter, which is then presented to the bank, and after this the funds are released into the new company’s operating bank account, available for regular use.
For a KK the minimum Board number is 3 or more Directors and 1 Statutory Auditor. Once elected, of the directors, one person actually resident in Japan is made the Representative Director. This person does not have to be the CEO, although normally they are, and so a non-resident person could be the CEO if required. The responsibility of the Representative Director is to manage the business, represent the company, make decisions on a day-to-day basis, sign agreements/contracts and other legal documents on the behalf of the company, report to the shareholders, and so on.
The Statutory Auditor is an individual trusted by the company and must not be someone employed there. They are theoretically supposed to have an understanding of the ethics and responsibilities of submitting correct books, but the reality is that normally the role is perfunctory. With the recent change in rules, though, companies can elect to not have a Statutory Auditor and instead use a professional firm– which clearly is a step by the authorities to introduce transparency into newly established companies. This is a positive development for foreign firms, who often found it difficult to find a trusted party willing to take on the risk of being a Statutory Auditor.
5. Items to prepare for incorporation
6. Capital payment
Since May 2006, companies can be capitalized with any amount over one yen. Practically speaking, though, unless you’re really bootstrapping, it is a good idea to have at least as much capital as is needed to run the business for a few months until revenues start to flow. Most people typically capitalize at around JPY5m to JPY10m for a small start up.
Although most capital is paid in as cash, it is also possible to use other assets, such as IP. There are certain requirements that kick in on large injections of value of non-cash assets, so be sure to check with a law firm first.
7. After incorporation
As a formally acknowledged juridical person, a KK must report its existence to various government agencies and complete its establishment process. While the nature of the reports required to be filed by the corporation will vary with the business to be conducted, the following is a basic guide to post-formation procedures following the company’s establishment.
If one or more persons are employed by the new corporation, the corporation must lodge the following reports with government agencies indicated:
Getting professional assistance
As will be apparent from the list of tasks involved in establishing a business, setting up a company in Japan is somewhat complicated, especially since the systems, language, and procedures are quite different to those used in other countries. Thus it helps tremendously to have an expert assist in putting a corporate entity together. There are sources of such experts: